How Does a Court Interpret a Confusing Contract?

When a Dispute Arises Over Ambiguous Terms Within a Contract a Court May Objectively Review the Circumstances In Existence When the Contract Was Entered Into By the Parties.

Understanding the Rules of Contract Interpretation Including the Extent and Limits of Reviewable Outside Information

Contract Document A contract that is ambiguous, meaning lacking of detail or terms on a specific concern that raises interpretation difficulty, may be interpreted via an objective review of the surrounding circumstances in existence when the contract was entered into by the parties; however, a court must be cautious to avoid injecting terms into a contract.

The Law

The law permits a court to consider the surrounding circumstances that existed when parties entered into a contract and the contract is ambiguous and troublesome to interpret merely from what is stated within the contract document; however, there are various restrictions on what a court may impart into a contract whereas a court must refrain from rewriting the contract so to, essentially, insert terms and the court must only interpret terms.  These principles were explained in the case of Winfund Software Corp. v. Progressive Financial Strategy Capital Group Corp., 2021 ONSC 6568 while citing the Supreme Court case of Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), [2014] 2 S.C.R. 633 whereas in Winfund it was said:

The Construction of Contracts

[44]  This was a contract case.  There was a written agreement between the parties.  In fact, two written agreements.  One of the parties alleged there was a term that it would receive support/training at no additional cost.  The other party alleged that the written agreement required payment for additional support/training.  This is the issue that led to the end of the relationship and the termination of the License Agreement/Addendum.

[45]  The leading decision on contractual interpretation is the Supreme Court of Canada in Creston Moly Corp. v Sattva Capital Corp., 2014 SCC 53. In Sattva, at para. 50, the Supreme Court of Canada held that contractual interpretation generally involves issues of mixed fact and law:

Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of a written contract, considered in light of the factual matrix.

[46]  However, at paras. 53-55, the Supreme Court in Sattva set out that in some cases the construction of a contract may involve an extricable question of law:

Nevertheless, it may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law (Housen, at paras 31 and 34-35). Legal errors made in the course of contractual interpretation include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor” (King at para. 21). Moreover, there is no question that many other issues in contract law do engage substantive rules of law: the requirements for the formation of the contract, the capacity of the parties, the requirement that certain contracts be evidenced in writing, and so on.

However, courts should be cautious in identifying extricable questions of law in disputes over contractual interpretation. Given the statutory requirement to identify a question of law in a leave application pursuant to section 31(2) of the AA, the applicant for leave and its counsel will seek to frame any alleged errors as errors of law. The legislature has sought to restrict such appeals, however, and courts must be careful to ensure that the proposed ground of appeal has been properly characterized. The warning expressed in Housen to exercise caution in attempting to extricate a question of law is relevant here:

Appellate courts must be cautious, however, in finding that a trial judge erred in law in his or her determination of negligence, as it is often difficult to extricate the legal questions from the factual. It is for this reason that these matters are referred to as questions of “mixed law and fact”. Where the legal principle is not readily extricable, then the matter is one of “mixed law and fact”….[para. 36]

As mentioned above, the goal of contractual interpretation, to ascertain the objective intentions of the parties, is inherently fact specific. The close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the instrument means that the circumstances in which a question of law can be extricated from the interpretation process will be rare. In the absence of a legal error of the type described above, no appeal lies under the AA from an arbitrator’s interpretation of a contract.

(emphasis added)

Was there an extricable question of law in this case and did the Deputy Judge err?

[47]  In my view, the Deputy Judge committed several extricable errors of in law in his approach and application of the legal principles of contract interpretation to ascertain what the agreement between the parties and whether there was a breach of that agreement. 

i) Express language of the “agreement”, Objective intention and “Entire Agreement” Clause

[48]  The first step in ascertaining the legal rights and obligations between the parties to a written agreement is to start with the plain and ordinary meaning of the words used by the parties.

[49] If there is ambiguity, then the court can look to surrounding circumstances to resolve any such ambiguity. In Sattva, the Supreme Court stated that while the surrounding circumstances will be considered in interpreting a contract, they cannot create a new agreement:

While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement (Hayes Forest Services, at para. 14; and Hall, at p. 30). The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract (Hall, at pp. 15 and 3032). While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement …

[50]  The surrounding circumstances includes looking at the objective intention of the parties to potentially resolve any ambiguity.  Consideration of the subjective intention (or expectations) of a party to the agreement is not a proper principle of contractual interpretation.

(a)               Use of Subjective Belief and Intention

[51]  In this case, the Deputy Judge failed to commence his analysis by considering the plain and ordinary meaning of the wording in the written agreements between the parties.

[52]  The Deputy Judge started with, reviewed and extensively relied on PFS’s subjective intention, expectations and understanding in determining the agreement between the parties. See example paras. 50, 54, 59, 62, 67.

[53]  The Deputy Judge failed to first determine whether there was an ambiguity in the written agreements, and even if there was, consider what was the objective intention of the parties.

[54]  In my view, the Deputy Judge permitted these subjective belief, intentions and expectations of one party to circumvent the clear and unambiguous language of the License Agreement/Addendum regarding the payment for additional support/training. In fact, the Deputy Judge failed to reconcile the written agreements which expressly and clearly set out Winfund’s obligation to provide support/training if PFS paid for that support/training at specified rates.

(b)               Use of Conduct which pre-dated the Addendum

[55]  The Deputy Judge stated in his reasons:

[69] Winfund was not entitled to rely on the contract regarding extra charges because it had, by its conduct over many years, and by the 2014 agreement between Mr. Pullman and Mr. Dharna evidenced an intention not to rely on that contractual provision. Nor could Winfund rely on the entire agreement provision in the Agreement. Tue Court of Appeal in the case of Shelanu Inc. v. Print Three Franchising Corp., 2003 CanLII 52151 (ON CA), [2003] O.J. No. 1919 at par. 54 held "Where the parties have, by their subsequent course of conduct, amended the written agreement so that it no longer represents the intention of the parties, the court will refuse to enforce the written agreement. This is so even in the face of a clause requiring changes to the agreement to be in writing."

[56]  The Deputy Judge also relied heavily on what he found was the prior conduct or performance of the parties, despite the fact that the conduct she relied on pre-dated the execution of the Addendum.

[57] The Deputy Judge relied on Shelanu Inc. v. Print Three Franchising Corp., 2003 CanLII 52151 (ON CA), [2003] O.J. No. 1919 where the court held that a subsequent course of conduct by the parties might amend the terms of a written agreement. The first problem is that no estoppel was pled by either party. More importantly, the Deputy Judge was relying on prior course of conduct – prior to the execution of the Addendum – to vary the written and agreed upon obligations of the parties. The Deputy Judge never went on to discuss or deal with the fact the parties entered into a subsequent written agreement that was inconsistent with the Deputy Judge’s finding.

[58]  The Deputy Judge also relied on a 2014 Agreement which I will deal with below.

(c)               Failure to properly consider Whole Agreement Clause

[59] Given the Deputy Judge’s reliance on subjective belief and the prior conduct, the Deputy Judge should have, but failed to, deal with the “whole agreement” clause in the subsequently executed Addendum which excludes all “prior discussions, negotiations, agreements”.

(d)               Evidentiary basis to support course of conduct

[60]  Part of the inconsistency in the Deputy Judge’s reasons is that the found at para. 53 that PFS had made minimal use of the Winfund support in the past and was never charged for this support.

[61] This begs the question as to how this “minimal” use of support would amount to a course of conduct resulting in a contractual obligation that Winfund provide support/training at no cost.

[62] PFS agreed during the trial that it did not get the new Winfund Software that resulted in the dissatisfaction until 2016 – after the Addendum was signed. As a result, a proper evidentiary basis for the “prior course of conduct” that Winfund not charge for support/training is not available on the record.

[63]  PFS submits that the Deputy Judge was permitted to come to this conclusion because of the following term in the Addendum:

….  To the extent that there is a conflict between the terms of this Addendum Agreement and the [Licence] Agreement, the terms of the [Licence] Agreement shall prevail as paramount.

[64]  In my view, this makes no commercial sense that the parties would enter into the written Addendum to amend the License Agreement but only to then ignore what the parties expressly included in the Addendum such as the duration of the agreement, the obligation to get free 5 hours support/training and pay for additional support/training, but permit PFS to continue to get the benefit of the lower price (which the Deputy Judge relied on for the assessment of damages).

(e)                 Conclusion

[65]  In my view, the Deputy Judge proceeded to essentially write or re-write the written agreement(s) executed by the parties with little or no consideration of the words in the written agreements.

[66]  The failure to follow the proper principles of contract construction constituted an extricable error of law.

As explained within the Winfund case, interpretation of ambiguous concerns within a contract requires a careful approach.  The law requires a court to objectively determine the intention of the parties without applying an interpretation that, essentially, inserts terms into a contract.

Additional Concerns

On another, but related, note, when a contract can reasonably be interpreted in different ways, where an interpretation favours one party and another interpretation favours another party, the principle known as contra proferentem states that the contract should be interpreted against the party that proferred the contract, meaning prepared and pitched the contract.

Learn About
Contra Proferentum
Summary Comment

The rules of contract interpretation permit a court to look outside of a written agreement for information that assists in determining the objective intention of the contracting parties; however, when reviewing any such surrounding circumstances, the court must be cautious to avoid gathering external facts contradictory, or supplemental, to the terms of the contract.  An interpretative exercise must remain interpretative without a court adding terms to the contract.

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